Analysis: We could be at mercy of unpredictable oil price

Prof John McLaren

WHAT do these figures mean in the build-up to a referendum on different potential financial futures for Scotland? Simply, it highlights the importance of the North Sea as the crucial variable in determining whether Scotland’s finances are relatively better or worse off than the UK’s.

This key role for oil revenues will inevitably continue into the foreseeable future.

The downside of oil’s importance is its future price is pretty much unknowable, hence we are not able to predict with any great certainty what the future holds. To illustrate this point, on 5 May, 2011, the day of the last Scottish election, the oil price fell by $12, or 10 per cent.

One way of looking at the relative fiscal position of Scotland vs the UK is to view it as one whereby, at present, Scotland receives higher spend per head than the UK as a whole through a transfer of funds from Whitehall, but this is currently offset by a similarly large transfer of “Scottish” North Sea revenues to Whitehall.

Under independence or full fiscal autonomy, this transfer would simply exclude Whitehall. The risk element introduced, however, is that, within the UK, this transfer of funds is fairly predictable; being outside of the UK, the transfer, or top-up, depends on the level of production and the price of oil and this, due to highly variable oil prices, is very unpredictable. At a high oil price, there would be a greater fillip from the North Sea than from the UK; at a lower oil price, the existing transfer payment would not be matched.

The other element is what to do about using some of the oil revenues to build up an “oil futures fund”. The problem for a more fiscally autonomous Scotland is that doing so leaves an initial hole in the budget that needs to be met by higher taxes or lower spending, just to get back to the position we are in now. Of course, there is no prospect of surplus fiscal funds for the foreseeable future, which makes the debate slightly academic, although perhaps the moral case remains intact regardless.

• John McLaren is a professor at the Centre for Public Policy for Regions at Glasgow University.